Keeping You Informed Matters
Economic Review July 2025
The second quarter of 2025 has been a case study in market resilience. Despite noisy headlines, shifting trade dynamics, and ongoing geopolitical tensions, diversified portfolios delivered strong results – a reminder that resilience and long-term discipline matter more than reacting to every twist in the news cycle. Our focus on valuation, quality, and balance continues to serve clients well, especially as opportunities emerge beyond the US.
The Outlook
Surprisingly, markets have performed quite decently
Over the past quarter, diversified portfolios generated modest gains. This hints at a calm, orderly period in world economics and politics. But it’s been nothing of the sort. Political chaos might be a better descriptor. If there’s a lesson in this contrast between chaotic news-flow and decent investment returns, it’s that it’s very difficult to map from world events into asset returns. Starting asset prices matter, of course, but so too do changes in expectations, and these are highly unpredictable. Another lesson might be for investors to remain focused on long-term investment, rather than reacting to events. In an age of instant access to both news and engaging narratives, this isn’t easy to do.
Tariffs
Last quarter we wrote that: “we normally associate free trade, high trust and stable policies with economic success. Today, we have rising constraints on free trade, declining trust between nations, and frequent policy swings. This could (should!) have implications for business sentiment and economic activity.” We still think that this is correct, based on an understanding of how people and businesses make spending and investing decisions. Surprisingly, though, share prices in most world markets are higher now than they were before President Trump unleashed his ‘Liberation Day’ tariff programme. Since then, we’ve seen new sets of tariffs on most countries, multiple changes in tariff rates, and pauses to tariffs. So why are share prices higher?
Financial Times writer Robert Armstrong attributes this to the ‘TACO Trade’: the notion that ‘Trump Always Chickens Out’ and that investors can safely ignore the noise. Set against this, we can see from the trade deals announced with the UK and Vietnam, that Trump isn’t ‘chickening out’ at all – baseline tariffs of 10% with the UK and 20% with Vietnam have been agreed. And we can tell from the 40% levy on the trans-shipping of goods via Vietnam, that China will face something close to 40% tariffs in due course.
A strong narrative in the investing world over the past forty or so years has been that ‘free trade’, accelerated by globalisation, is a win-win. Markets currently seem to be signalling that ‘barriers to free trade’ are even better. At least one of these narratives is wrong.
Deficits
The US and UK government spending deficits continue apace. In the US, Trump’s ‘Big Beautiful Bill’ (or budget bill) is projected to add trillions of Dollars to the US government debt. In the UK, a series of political U-turns reveals that there is little or no appetite for welfare cuts in a country that already overspends. France is no different. Here’s a comment from Credit Agricole’s economics team, written in May: “public finances remain the most critical and structural sticking point in French politics right now. Nothing has changed since last year’s snap election. France still has to deliver its largest fiscal adjustment of the past 70 years to stabilise its debt-to-GDP ratio”. So, France too needs spending cuts, or tax rises, or both. “Without tackling these issues…the debt-to-GDP ratio will continue on its upward path” warns Credit Agricole.
Only a few countries seem capable of addressing problematic histories of government overspending. Today, this list includes Argentina, Greece and, arguably, Spain. But their seriousness only came about after years of crisis, which manifested itself via some miserable mix of inflation, unemployment and devaluation. This wasn’t good for society and wasn’t good for investors.
Does it matter if governments wilfully overspend, egged on by electorates that suspend disbelief? For a while, no, especially if the world’s largest economy sets the example. But in the end, yes: ‘paper’ or fiat money becomes debased. Perhaps this is why gold (a ‘non-paper’ currency) has risen so much in nominal value. Meanwhile, so long as bond markets remain calm, shares enjoy the boost to economic activity that comes from widescale government overspending.
Conflicts
After the fall of the Berlin Wall in 1989, a powerful new investing narrative emerged: the ‘Peace Dividend’, arising from the end of the Cold War. This peace dividend would boost wealth, as millions of new consumers in the East joined global markets, and as governments re-allocated spending away from defence, towards other uses. This seemed logical.
Recently, a new narrative has emerged, namely that ‘re-armament will boost economic activity’. Several NATO nations announced plans to raise spending towards a new target of 5% of GDP; Russia and Ukraine currently have ‘war-economies’; and China is growing its defence spending by around 7% per annum. Everything else equal, this re-armament narrative also seems logical in the short-term, ominous as it may feel. Germany, perhaps the epicentre of re-armament, has had one of the best performing stock markets this year.
One potential conflict that investment strategists have worried about for years is that of a war between Israel and Iran, with direct attacks on Iran’s nuclear facilities. Investors feared that this would lead to a wider Middle East conflict, an oil price spike, and global recession. In June, we saw Israeli and then US attacks on Iran, and Iranian counterattacks, just as had been feared. Markets were almost completely unfazed. The oil price jumped for a few days but quickly subsided and is now actually down for the year. Israel’s (small) stock market has more than doubled in the past year. Mapping geopolitical events to asset prices is difficult! Of course, the long-term implications of Israeli and Iranian actions in the Middle East are unknown.
Portfolios
In Q2, we remained invested despite the flurry of news and events, and all portfolio types produced modest gains. It would have been quite natural to want to sell risky assets in response to bad news, but this would (with hindsight) have been the worst thing to do.
US Dollar weakness was one of the main features driving investor returns. Perhaps the Dollar fell because of tariffs, or deficit spending, or deteriorating trust in government. Whatever the cause, Dollar weakness lowered the returns from US assets. Our clients’ portfolios had slightly less exposure to US assets than their comparable indices, and this helped boost relative performance too.
In unconstrained adventurous portfolios, we added a ‘European defence’ exchange traded fund. Although European defence shares have performed well since Russia’s invasion of Ukraine in 2022, their valuations do not appear to discount in full the planned increases in European defence spending over the next decade.
Outlook
It seems fair to expect lagged effects in the economy from the US tariff changes. In the near-term, higher import prices for US businesses and consumers should cause US demand to moderate while leading to greater price inflation. In the medium-term, tariffs may be deflationary, via reduced global activity. Uncertain as to the exact impact of tariffs, the US Federal Reserve has held policy interest rates steady for a while now, even as others call for immediate cuts. Once tariff rates are known, it’s likely that supply chains will start to be re-configured. Stock markets seem sanguine to this uncertainty and change, though the weak US Dollar is sending a less relaxed message.
The past quarter has shown how difficult it can be to forecast asset returns from examining news flow. Staying invested in a well-diversified portfolio of assets is one of the best ways to deal with this problem. If one was to tilt in any direction, favouring non-US shares, which offer meaningfully better value than US shares, looks sensible. This is, indeed, how we are positioned for clients, though we’re aware that markets can be driven by caprice, as much as logic.
Key facts about the world
United Kingdom
- In a surprise increase to 3.6% in June, inflation rose to its highest level since January 2024, remaining well above the Bank of England’s 2% target.
- The UK economy grew 0.7% in Q2, the fastest of the G7, supported by broad-based sector gains.
- UK equities gained, with the FTSE All Share +3.2% (or +9.6% in USD terms) led by mid-cap stocks, as international investors returned to UK assets.
Europe
- The ECB cut interest rates by 0.25% in June after inflation eased to 1.9% in May, from 2.2% in April, hitting the central bank’s target (2-2.25%).
- Eurozone growth remained muted, but the labour market held firm, with unemployment at a record low of 6.2%.
- European equities posted their best quarter in over two years, helped by easing rate expectations and foreign inflows.
Asia
- Japan’s Nikkei rose nearly 15% as investor confidence grew on the back of corporate reforms and strong share buybacks.
- Emerging Asian equities also rallied, helped by a weaker US dollar and easing trade tensions. The MSCI Emerging Markets Index gained +11.9%.
- In contrast, China lagged the region, with a fragile recovery and soft domestic demand weighing on equity returns.
North America
- The US Federal Reserve held rates steady at 4.25-4.5% as inflation cooled and unemployment dipped to 4.1% in June.
- A spike in imports ahead of threatened tariffs dragged the Q2 US GDP print slightly negative (around –0.5%), masking an otherwise steady domestic demand trend.
- US equities rebounded strongly, with tech and AI stocks powering the S&P 500 and Nasdaq to new highs, even as US dollar weakness, fuelled risk appetite and boosted overseas equity returns.
South America
- Growth remained subdued, with regional GDP growth forecast at 1–2% in 2025, with limited tailwinds from global trade.
- Brazil hiked rates again in Q2 to 14.25%, boosting the Real against major currencies and helping local equities rally.
- Commodity exporters like Chile faced pressure from falling copper prices and weak external demand as tariff concerns impacted growth and trade over the quarter.
Africa
- Africa’s GDP is expected to grow 3.9–4.3% in 2025, led by East Africa at nearly 5.9%.
- Inflation remains a challenge with over 15 African economies still facing double-digit inflation. Average debt servicing now consumes 27% of governments revenues across Africa.
- However, the outlook varies across Africa with more than 20 countries forecast to grow above 5%, despite challenges from climate, conflict and debt.
Q2 2025 Performance Review
Unconstrained strategies
Key facts
Solid performance amid ongoing market volatility
Diversification across asset classes supported returns
Alternatives (gold, commodities, infrastructure) added resilience
Bonds delivered steady gains as interest rates peaked
Equities positive, with UK/Europe strength offsetting a lagging US
Earlier shifts to passive funds improved cost-efficiency and alignment
Summary
Despite a turbulent news backdrop and volatile markets, the Unconstrained strategies delivered resilient performance in Q2 2025, posting gains across portfolios. A well-diversified allocation helped navigate the quarter’s political and economic uncertainty, and notably, our enhancements in Q1 – such as increasing passive fund exposure – contributed to smoother performance and lower costs for clients.
Alternatives were standout contributors, particularly the VT Gravis UK Infrastructure Income fund, which delivered +10.3% in Q2 and +10.6% YTD. Infrastructure remains a valuable source of inflation-linked income, and its performance underlines the importance of holding real assets during uncertain periods. Gold also continued to play its defensive role effectively, with the Royal Mint Gold ETC up +5.5% this quarter and +25.8% YTD, supported by global central bank demand and rising concerns about fiat currencies. These two holdings have provided important ballast and diversification.
Fixed income exposures performed steadily, contributing positively across the board. The Artemis Corporate Bond Fund rose +3.0% in Q2, bringing its YTD return to +3.8%, and short-dated government and inflation-linked bond ETFs also provided modest but stable gains. These positions continue to offer both income and downside protection, helping portfolios remain resilient.
Equities made a strong recovery this quarter, particularly in the UK and Asia. Within the UK, both RGI UK Recovery (+11.4%) and Vanguard FTSE 250 (+12.5%) delivered standout returns, supported by a rebound in small and mid-cap shares and a rotation back toward domestic opportunities. These gains were further supported by iShares UK Equity Index (+5.2%), helping to lift overall UK equity allocations materially.
Overseas, the Vanguard ESG Developed Asia Pacific ETF was one of the strongest performers, rising +13.7% in Q2, as the region benefited from stable inflation data and policy easing expectations. In the US, growth stocks rebounded, led by TM Natixis Loomis Sayles US Equity Leaders (+12.3%), a sharp reversal after Q1’s pullback. The Xtrackers S&P 500 Equal Weight ETF (+5.3%) also contributed positively, providing more balanced exposure amid a narrowing US rally. While the BNY Mellon US Equity Income fund remains in negative territory YTD, the breadth of our equity positioning helped smooth overall returns.
Q2 marked a clear validation of the cost-effective changes implemented in Q1, with passive allocations delivering excellent results. Strong returns from infrastructure, precious metals, and regional equity exposures have positioned the portfolios well for the second half of the year. We remain focused on maintaining a robust mix of growth and defensive assets, navigating uncertainty while capturing opportunity.
| SECTOR | Q2 2025 | 1 year to 30/06/25 | 1 year to 30/06/24 | 1 year to 30/06/23 | 1 year to 30/06/22 | 1 year to 30/06/21 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | 0.7% | -6.1% | -0.0% | -16.8% | -20.2% | -4.3% | -9.8% |
| IA £ Corporate Bond | 2.5% | 5.7% | 10.5% | -4.8% | -13.1% | 3.5% | 0.0% |
| IA Property | 1.3% | 2.3% | -1.0% | -12.1% | 11.1%% | 1.1% | 0.0% |
| IA UK Equity Income | 7.8% | 10.5% | 14.6% | 4.0% | -0.5% | 25.4% | 10.4% |
| IA UK Smaller Companies | 13.1% | 2.4% | 13.9% | -5.7% | -22.6% | 50.8% | 5.1% |
| IA North America | 4.2% | 4.7% | 21.3% | 11.9% | -3.7% | 27.3% | 11.7% |
| IA Europe Excluding UK | 7.2% | 9.0% | 11.7% | 18.6% | -12.5% | 23.8% | 9.3% |
| IA Japan | 5.8% | 7.3% | 10.1% | 12.4% | -11.8% | 13.1% | 5.8% |
| IA Asia Pacific Excluding Japan | 6.0% | 4.6% | 10.0% | -3.1% | -10.8% | 26.9% | 4.8% |
| IA Global Emerging Markets | 6.0% | 4.9% | 11.6% | -0.3% | -17.3% | 28.3% | 4.4% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q2 2025 Performance Review
Ethical strategies
Key facts
Positive returns achieved through a diversified, cautious approach
Alternatives (gold and infrastructure) delivered strong gains and stability
Fixed Income provided solid support with broad-based gains across bond holdings.
Equities turned modestly positive, with strong UK/Europe performance outweighing a weaker US
Recent fund changes to passive solutions enhanced diversification and reduced costs
Summary
Against a backdrop of mixed economic signals and geopolitical tensions, the Ethical strategies delivered positive returns in Q2 2025. Our cautious, well-diversified approach once again proved its worth – blending equities, fixed income, and alternatives to achieve resilient performance in an uncertain environment.
Alternatives were the largest contributors to performance, providing defensive strength and sustainable income. In particular, our exposure to precious metals and infrastructure paid off handsomely. The Royal Mint Responsibly Sourced Physical Gold ETC continued to shine, gaining +5.5% in Q2 and reaching +25.8% year-to-date, as gold benefited from its status as a hedge against inflation and uncertainty. Renewable infrastructure also bolstered returns – the VT Gravis UK Infrastructure Income fund jumped +10.3% over the quarter (now +10.6% YTD), reflecting renewed investor demand for stable, inflation-linked cash flows. This follows the sale of our Downing Renewables & Infrastructure holding in January, and the Gravis fund has more than picked up the torch, demonstrating the value of infrastructure in our ethical portfolios.
Fixed income holdings provided reliable ballast, delivering steady gains across the board. With interest rates appearing to have peaked, our bond funds benefited from both income and modest capital appreciation. Investment-grade corporate bonds were especially supportive – for example, the Rathbone Ethical Bond Fund rose +2.5% in Q2 (up +3.5% YTD), and the Aegon Ethical Corporate Bond Fund gained +2.5%. The shorter-duration bonds also contributed positively (Vontobel TwentyFour Sustainable Short-Term Bond +1.8% for the quarter), helping to stabilise portfolio values. These fixed income results highlight the strength of our conservative positioning, as broad-based bond gains added to the quarter’s overall performance. Notably, sterling weakness earlier in the year had weighed on some US bond holdings, but by maintaining a globally diversified mix – including predominantly GBP-hedged positions – we kept bond performance on track.
Equities were the leading driver of performance this quarter, outperforming fixed income and reflecting the benefit of our global diversification and ethical fund selection.
UK equities performed particularly well: the newly introduced Amundi MSCI UK IMI SRI ETF rose +7.4%, and abrdn UK Ethical Equity Fund returned +9.7%, aided by the mid- and small-cap rebound. The Montanaro UK Income Fund also added +9.0%, reversing much of the earlier weakness.
European equities extended their strength, led by the EdenTree European Equity Fund, which gained +9.5% in Q2 and +18.9% YTD, one of the best performers in the portfolio. By contrast, US equity exposure remained a soft spot. The iShares US Equity ESG Screened ETF did bounce +5.3% in Q2, but it remains slightly down year-to-date (around –4.1%) after the steep decline in Q1. Our other global sustainable equity funds (such as Janus Henderson Global Sustainable Equity and Jupiter Ecology) also nudged into positive territory, +8.6% and +6.9% respectively. On balance, the broad equity portfolio contributed positively this quarter and importantly, our tilt towards value and income-focused stocks (for example, BNY Mellon Sustainable Global Equity Income) helped cushion the impact of US market volatility.
Overall, the Ethical strategies benefited from the proactive adjustments made earlier in the year. We fortified the portfolios’ defensive core – adding to Trojan Ethical Fund (which returned +1.5% in Q2 and is up +3.6% YTD) to deepen our mix of high-quality bonds, equities, and gold within a single holding. We also replaced a UK equity fund after a manager change with a low-cost UK index aligned to our socially responsible investing (SRI) criteria, and introduced a broader Asia-Pacific ESG tracker in place of a narrower Japan fund. These moves have enhanced diversification and reduced costs, all while upholding our stringent ethical standards.
Across the board, our Ethical portfolios benefited from being well-diversified and cost-efficient, with clear alignment to our sustainability and impact objectives. With strong performance from equities, consistent returns from bonds, and continued resilience in alternatives, the portfolios are positioned robustly for the remainder of 2025.
| SECTOR | Q1 2025 | 1 year to 30/06/2025 | 1 year to 30/06/2024 | 1 year to 30/06/2023 | 1 year to 30/06/2022 | 1 year to 30/06/2021 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | 5.5% | 4.5% | 17.8% | 10.5% | -5.8% | 21.3% | 9.2% |
| UK ESG Enhanced | 3.1% | 10.1% | 14.0% | 9.2% | -0.9% | 20.5% | 10.4% |
| US ESG Enhanced | 4.2% | 5.9% | 24.9% | 13.7% | -1.5% | 27.2% | 13.5% |
| Developed Market Europe Sustainable | 5.0% | 7.1% | 12.6% | 14.8% | -10.3% | 23.9% | 9.0% |
| Emerging Market ESG Enhanced | 5.5% | 2.7% | 10.1% | -4.5% | -15.2% | 19.9% | 1.9% |
| UK Corporate Bond Sustainable | 3.1% | 5.1% | 10.5% | -8.3% | -15.1% | 1.9% | -1.6% |
| Global Corporate Bond Sustainable | -1.5% | 1.1% | 4.9% | -2.8% | -5.7% | -6.0% | -1.8% |
| Global Green Bond | 2.6% | 4.1% | 3.4% | -4.6% | -11.6% | -6.0% | -3.1% |
| Global Renewable Energy | 7.3% | 3.1% | 1.6% | 5.9% | 0.5% | 37.0% | 8.8% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.